A strong jobs report rallies USD

The US dollar rallied to multi-week highs against the major currencies on Friday after the release of a strong monthly employment report that delivered on key performance areas and may have finally convinced the Fed to start raising the interest rates as early as in June.

257K new jobs were created in January, exceeding the 230K jobs the market had been expecting. In the last three months, the economy managed to create over 1 million new jobs, and this pace is the best for job growth since 1999.

Meanwhile, the much talked about labor participation rate, which had been mired near a 30-year low, managed to tick up by 0.2 percent in the past month to 62.9 percent. It was 66 percent before the 2007-9 recession. The January pickup in the participation rate suggests that many who gave up looking for work have regained their optimism and re-entered the labor force. The labor force increased by 703K, and this pick up explains why the unemployment rate rose by 0.1 percent to 5.7 percent in January.

The best news of the January report was an increase in the average hourly earnings. Most pundits have dismissed recent job reports, which have suggested that the economy has fully recovered, by citing that wages have remained unchanged since the recession. With no wage growth, the recovery will remain precarious because consumer spending drives 70 percent of economic activities. Silencing the skeptics, the average hourly earnings rose 12 cents in January to $24.75, following a decrease of 5 cents in December.

For the past six months, the Fed has been deliberating on the timing of its first rate hike since 2006 but remained hesitant to move on it, noting that a lack of wage increases could be a sign of the continued slack in the economy. However, Friday’s January employment report may have finally convinced the Fed policy committee members that the rate hike could take place as early as June.

Higher interest rates will make dollar assets more attractive to overseas investors and thus continue to support the dollar. This week, retail sales report will be released on Thursday. If there is a sign that consumers have picked up their spending last month following a pickup in wages and falling gas prices, then the dollar rally may accelerate this week. Stay tuned.

EUR-USD plunged lower immediately after the release of Friday’s US job report and is trading near 1.1300 early this morning. Greece’s credit rating was lowered by Standard and Poor’s, suggesting that Greek finances are rapidly deteriorating as a new anti-austerity government prepares to continue its acrimonious debt negotiation with the EU and ECB this week. The euro is forecast to go lower ahead of the 4th quarter EU Gross Domestic Product report release on Friday.

GBP-USD fell to 1.5225 on Friday afternoon after making a one-month high at 1.5340 earlier in the week. The pound has been well supported after solid UK data last week. This includes the January PMI surveys that showed all three sectors (manufacturing, construction and services) beating expectations, mostly reversing unexpected weakness in December. This week, the pound will be looking for additional support from the Bank of England (BOE) Quarterly Inflation Report on Wednesday and BOE’s Governor Mark Carney speech on Thursday.

USD-CAD initially fell following the solid jobs reports from both sides of the borders, falling to 1.2377 from 1.3430 before being dragged up to 1.2525, as the US dollar rally intensified further later in the day. Employment rose to 35.4K in January which is much better than the 5K expected, and the unemployment rate fell to 6.6 percent from 6.7 percent in December. The substantial improvement in the labor market conditions may persuade the Bank of Canada not to cut the interest rates in March and provide a support for the Canadian dollar going forward. There is no major economic report scheduled for release this week.

AUD-USD settled lower after a reaching a one-week high at 0.7875. This happened in the wake of the Reserve Bank of Australia (RBA) monetary statement last week that downgraded growth and inflation forecasts by a little less than most analysts had expected. That said, the Australian dollar remains under pressure as the central bank reiterated its view that the dollar remains overvalued. Therefore, most analysts expect the central bank to make another rate cut by next month. RBA Governor Glenn Stevens speech is scheduled for early this morning, and the January Employment Report will be released on Thursday.